Big World, Small Wages

the shrinking dollar, by frankieleon
The shrinking dollar.  Photo courtesy of frankieleon.

We are now in an era when unemployment is low, but wages are not increasing.  This is unusual.  Normally when unemployment is low, wages increase.  Even the meanest of bosses would look over their shoulder and increase wages to “stay competitive with market,” when they’re actually just worried about losing key people and unions making inroads.  But the rules of business have changed.

According to the New York Times article Plenty of Work; Not Enough Pay the reasons why wages are staying low are incredibly varied.  Long story short: It’s a dog-eat-dog world and we’re in a big, hot mess.

  • Unions have less power than in the past. Last year only 11% of the American workforce was unionized, down from 20% in 1983.  This decline coincides with American wages largely breaking-even since 1972 on an inflation-adjusted basis.
  • The article interviews Lawrence Mishel from the Economic Policy Institute, who notes that “people have very little leverage to get a good deal from their bosses…” and this reduces expectations to the point where “People who have a decent job are happy to just hold down what they have.”
  • It’s not just workers and unions, businesses are anxious, too. In Japan, companies “mostly sat on their increased profits rather than share with employees.”  Businesses are still spooked from the popping of the real estate bubble in the early 1990s, which was a prequel to the larger subprime mortgage fiasco in the USA around 2008.  In Norway, wages increased as a result of their oil riches in the run-up to 2008.  Their higher cost structure put them at a competitive disadvantage during that same recession and business in Norway don’t want to make the same mistake.
  • Employers who are experiencing good business results are trying to get more work done by hiring temporary employees. After all, if a business can get a large fraction of their work done by contractors, it’s easier to shed the contractors during a downturn.  While temporary work is a negative experience for those forced into it, it is also something business leaders need to do out of fear that they themselves could be in trouble at any time.
  • In Norway and Germany, unions have negotiated special deals to keep wages low, ensure businesses stay cost-competitive, and save local jobs. This arrangement puts pressure on lower-cost jurisdictions, such as Italy and Spain.
  • Globalization is connecting developing-world factories more closely to the individual consumer. After “eliminating the middle-man,” there are fewer bottlenecks in getting goods to market.  With fewer middle players, there is not the same opportunity for employment in these roles.  Factories have fewer hurdles to dropping goods right at your doorstep.  Online leaders, such as Amazon, continue to ravage physical retail.  Meanwhile, warehouse operations and trucking goods across continents are increasingly prone to automation by robots and artificial intelligence.
  • In addition to buyers purchasing goods from developing countries, immigrants are often brought in from those same countries, keeping wages down. It is virtuous to be sympathetic to the plight of immigrants, but there is also truth to the complaint that businesses are using immigrants as pawns. In Norway, the social democratic system that shares wealth with the unionized workforce is being undermined by start-up businesses employing immigrants from Eastern Europe at wages that are below the agreed standard.  The unions are struggling to ensure these immigrants get the same rights as others.  Labour’s biggest struggle is to break even.

The supply-and-demand mantra that the market will correct itself has simply become a falsehood.  This raises the possibility that for our gains, we can’t let the market take care of us.  The possible solutions are varied and the solutions you lean towards probably match the opinions of those around you.

Perhaps families and churches will help us, or maybe it will be unions and the government.  But the emerging consensus is that market forces are nobody’s friend.

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